The Federal Reserve is expected to cut rates by 25 basis points at next week’s meeting, but Bank of America warned that Jerome Powell is facing a FOMC that has been at odds with each other for years. BofA expects Powell to try to deliver a “hawkish cut,” a compromise that would be difficult to implement given the committee’s divisions.
Markets are expecting only a little easing after December and BofA expects the policy statement to drop the phrase that unemployment “remains low” while signaling that the likelihood of additional rate cuts is now higher.
The new macro projections are expected to raise the 2025–2026 growth outlook, but lower inflation forecasts and slightly raise the unemployment rate forecast. This gives the Fed room to cut rates without undermining the credibility of the economic outlook.
Powell is expected to focus on potential in January and whether policy remains tight. A solid post-meeting data report could also disrupt the steady-state signal.
In currency markets, BofA expects a modest reaction to the cuts, but balance sheet measures such as repo operations will have a greater impact. USD is expected to react slightly positively.
